Banks may be sitting on potentially risky single-name loan concentrations, suggests a study from Standard & Poor’s Ratings Services.

“Due to the exceptionally benign credit environment, with corporate credit losses at historic lows, attention has shifted away from banks’ single-name concentrations,” said Standard & Poor’s credit analyst Bernard de Longevialle. “But we believe that the combination of high concentrations and banks’ increased risk appetite could leave the banking system exposed to unexpected deterioration in the corporate credit cycle, particularly in Japan and Western Europe.”

For the first-ever Standard & Poor’s global study of single-name concentration risk, it analyzed the top 100 banks in Western Europe, North America, Japan, and Australia and found that the average size of large single-name exposures is equivalent to 6.6% of adjusted total equity.

S&P notes, however, that the variance is wide: some banks have virtually no measurable concentration, while others show extremely high ratios. Lending concentrations are highest in Japan, followed by Western Europe, North American, and Australia.

It also observes that banks rarely use credit derivatives to manage single-name concentrations, despite the mounting popularity of these instruments.

“The current regulatory regimes governing single-name concentrations are generally not stringent enough in our view,” added De Longevialle. “Disclosure requirements conceal varying degrees of concentration risk among
regions.”

The second pillar of Basel II specifically singles out credit concentration as one risk area requiring assessment by regulators, but fails to clarify the approach to be taken. “Given the insufficient emphasis historically placed on this issue, we believe investors would benefit from increased public disclosure requirements on the size of large exposures,” S&P says.